1
ABC Global Research Global Research - Commodities Perspectives on the bullion market April 2013 James Steel Analyst HSBC Securities (USA) Inc View HSBC Global Research at: Issuer of report: HSBC Securities (USA) Inc. Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

2
22 Gold holds up in times of crisis Since the global financial crisis in 2008, gold has appreciated significantly as the Federal Reserve initiated QE2 and Operation Twist Gold notably outperformed other asset classes during this period, underscoring its traditional function as a safe haven Gold has been supported by global accommodative easing, economic uncertainty, commodity price increases, and geopolitical risks In the latter half of 2011, steep equity market declines, amidst deteriorating economic prospects and eurozone sovereign-debt concerns, boosted the USD and triggered a major correction in gold prices Source: Reuters Returns for various asset classes,

3
33 Gold has not outperformed other asset classes so far to 2013 Gold outperformed most assets in early 2012 in anticipation of additional monetary easing, heightened geopolitical risk, and economic uncertainty Following the February meeting of the Federal Open Market Committee, gold fell when Federal Reserve Chairman Ben Bernanke did not announce additional monetary policy easing The FOMC QE3 announcement in September 2012 triggered a gold rally, which subsequently fizzled out The equity rally has drawn investment away from gold Source: Reuters Returns for various asset classes, 2012 through April

4
44 Dollar and gold trade inversely most of the time Gold and the USDs traditionally inverse relationship is based on: Desirability of paper vs hard assets Mining economics Consumer demand outside the USD bloc USD weakness is viewed as fueling golds long-run advance The relationship has periodically broken down during the eurozones sovereign- debt crisis but appears to have re-emerged Source: Reuters The EUR and gold

5
55 Gold is down in terms of all currencies Despite heavy losses in late 2012 and 2013, gold is only down slightly against all major freely floating currencies since 2011 This helps to reaffirm its status as a surrogate currency Source: HSBC, Bloomberg Golds returns compared to those of various currencies and platinum

6
66 Funds dollar positions generally mirror gold positions The USD/gold relationship is demonstrated by the net spec positions on the Comex and IMM A widening of short USD positions typically coincides with a build in long gold positions Historically, funds like to be long gold, but occasionally they go long the USD and reduce long gold positions However, for a while, funds went long USD and increased long gold positions; this is generally a sign of elevated investor risk Source: CFTC Gold and USD net speculative positions

7
77 Gold and scenario probabilities The table is produced by HSBCs Asset Allocation team and shows a normalization in the global economy The reduction in fat risk events has undermined the safe haven demand for gold Source: HSBC HSBC asset allocation teams scenario probabilities

8
88 Gold and equities Gold and equities decoupled in late 2012 and are trading divergently Source: HSBC, Bloomberg Gold and equities

9
99 Gold in exchange-traded funds After peaking in late 2012 at the equivalent of c90% of annual mine output, gold exchange traded fund holding have fallen Holdings now stand at 73.4moz, down 11.3moz from the peak of 84.6moz This liquidation helps explain golds decline Source: HSBC, Bloomberg Total gold holdings in exchange-traded funds

10
10 Gold and commodities Golds decline was also part of an overall commodities rout. Source: HSBC, Bloomberg Golds returns compared to other commodities

11
11 Gold coins The drop in price has led to a surge of physical demand The US Mint is the largest bullion mint in the world and report a marked jump in demand, inside and outside the US Source: HSBC, US Mint Gold coin sales by the US Mint

13
13 Gold and China The drop in prices has set off a wave of demand in price sensitive gold- consuming nations This chart shows the strong increase in imports into China from Hong Kong in reaction to lower prices Source: HSBC, Hong Kong Census and Trade Statistics China gold import from Hong Kong

14
14 Gold and US federal debt Declines in federal debt ratios coincided with a fall in the gold price in the 1990s Rising debt levels since 2000, particularly since 2007, have coincided with a huge gold run Historically, rising government debt has been positive for gold prices The nonpartisan Congressional Budget Office forecasts increases in the debt- to-GDP ratio until at least 2015 Source: Congressional records, Reuters Gold and US public debt

15
15 Gold and central banks Source: Bloomberg, HSBC, World Gold Council Gold sales and (purchases) by the official sector Purchases Sales Central banks have swung to being net buyers of bullion for some of the following reasons: Gold is historically used war chest or in times of crisis Can be utilized to settle underlying balance of payments deficits Can be useful in stemming a run on a currency Is a traditional proven diversifier in a US dollar-laden portfolio High gold reserves have significant prestige value

17
17 Gold mine production High prices have stimulated production, and gold prices are still well above marginal costs of production There is no Saudi Arabia of gold Gold production is constrained by: Falling grades Inadequate infrastructure Resource nationalism Power and fresh-water shortages Labor and skilled personnel shortages Long waiting times for mining equipment Gold mine production (tonnes) Source: HSBC, Thomson Reuters/GFMS, Bloomberg

18
18 Gold jewelry demand Jewelry is the biggest single source of physical demand, but it is losing market share to investment Emerging-market gold demand is highly price- sensitive; this is helping to make gold prices more volatile The recent price plunge should encourage greater physical demand Gold jewelry demand (tonnes) Source: HSBC, Bloomberg, World Gold Council

19
19 India and China: Gold jewelry demand As Chinas gold jewelry demand has increased, Indias has declined The two nations together account for more than half of gold jewelry demand worldwide Source: Bloomberg, HSBC, World Gold Council India and China: Gold jewelry demand

20
20 Indian gold jewelry demand and the INR The weaker the INR, the lower local gold demand is, typically We expect to see a notable rise in Indian demand this year Source: Bloomberg, HSBC, World Gold Council Indian gold jewelry demand and the INR